NEW YORK, July 11 (IFR) - Tiny California-based Progreso Financiero surprised many in the ABS market in June by selling its second securitization based on loans that have a relatively high risk of not being repaid.
The niche lender, which targets Hispanics with little or no credit history, underpinned the deal with loans that average just US$1,600 but carry at least a 30% interest rate.
Despite what might seem to be shaky collateral, however, Progreso sold the unrated US$102m consumer loan securitization to a wide range of buyers, CFO Jonathan Coblentz told IFR.
Led by Jefferies, the deal was sold to institutional investors, banks, money managers and hedge funds, some of whom, he said, had also bought Progreso’s first trade.
The risks for investors are plentiful, of course, not least because the debt is unsecured; there is no collateral available to seize if borrowers fail to repay.
Even so, Progreso sold the A and B classes of the new deal with 3.5% and 6% coupons respectively - even cheaper than the 4% and 8% on its first US$137m trade a year ago, Coblentz said.
“One reason we have repeat investors is that people were able to look at the track record of the first deal, and it was better than projected,” he said in an interview.
To help offset the risks to buyers of the bonds, the issuer retained a subordinate 15% slice of each trade.
Like similar firms OnDeck and Social Finance, Progreso is trying to fill spaces in the consumer loan market abandoned by banks in the wake of new regulations since the financial crisis.
Even as those traditional lenders have pulled back, however, lending to riskier customers in the United States since the crisis has again been on the rise.
According to Equifax, six out of 10 US consumer finance loans now go to subprime or other higher risk borrowers.
That spells opportunity for young companies like Progreso, which was founded by Coblentz, a 14-year veteran of ABS banking at Goldman Sachs and Credit Suisse, in 2005.
Licensed to operate in California, Texas and Illinois, Progreso typically makes loans with a 17-month maturity at an eye-watering interest rate of 30%.
And some customers likely are on the hook for a great deal more than that.
In California, for example, Progreso is part of a pilot program to help borrowers gain access to small loans, said Alana Golden of the California Department of Business Oversight.
In exchange, the company is exempt from state usury laws and other limits on the fees that banks can charge for loans.
One ABS banker, who was not involved in selling the new trade and asked not to be named, said at least some customers having trouble paying would simply refinance the loans.
And that could mean a new origination fee, late fee, interest charges and other costs - all of which could make it even more unlikely for any loan not to be repaid, and thus increase the risk for investors in the securitizations.
Because it is not a public company, Progreso is not required to make public certain information, though Coblentz said the percentage of failed loans was in the single digits.
Several ABS bankers said this was a surprisingly low figure, especially as much of Progreso’s customer base can simply leave the country, and the loans, behind.
“It’s not a customer pays or doesn‘t,” one of them said. “It’s probably more like kicking the can down the road.”
But Coblentz insists Progreso is seeking quality borrowers, saying it aims to more than double its consumer loan business to one million customers by 2016, and to diversify into auto and small business loans in three to five years.
“We only want to lend to customers who we believe can repay,” he said. (Reporting by Joy Wiltermuth; Editing by Marc Carnegie and Natalie Harrison)